Analyzing Starbucks’s Inventory Disclosures Obtain Starbucks’s 2017 annual report either using the “Investor Relations” portion of its web site (do a Web search for Starbucks investor relations) or go to http://www.sec.gov and click “Search for company filings” under “Filings and Forms (EDGAR).”
Required:
- 1. What is the primary cost flow assumption that Starbucks uses: Discuss how the amounts reported under this assumption compare to amounts reported under alternative cost flow assumptions. Explain why you think Starbucks selected this method.
- 2. What type of inventory system—perpetual or periodic—do you think Starbucks uses?
- 3. Does Starbucks have any purchase commitments? If so, are they included in inventory?
- 4. Assume ending inventory for 2016 was $1,306.4 million. Compute the inventory turnover ratio for 2018 and 2017. What is your evaluation of the difference? (Round your answer to two decimal places.)
- 5. Recreate summary
journal entries to record the transactions that affected inventory during 2018. (Assume all inventory purchases were on account.)
1.
Determine the primary cost flow assumption used by Corporation S. Explain the manner in which the amounts reported under this cost flow assumption are different under alternative cost flow assumptions and also explain the reasons behind the selection of the cost flow assumption by Corporation S.
Explanation of Solution
Inventory cost flow assumptions: These are the methods used by the companies to compute the cost assigned to inventory from the time inventory is bought to the time inventory is sold.
Corporation S primarily uses a moving average cost flow assumption. Since, the prices of the goods are based on an average of the goods available for sale. The moving average cost flow assumption yields amounts for ending inventory and cost of goods sold that fall between the reported amounts produced by the other cost flow assumptions. Average cost may have been selected due to the fluctuating costs that often exist in the market for coffee beans.
2.
Identify the type of inventory system used by Corporation S.
Explanation of Solution
Perpetual inventory system: The method or system of maintaining, recording, and adjusting the inventory perpetually throughout the year, is referred to as perpetual inventory system.
Corporation S uses perpetual inventory system. In its Notes to financial statements (Note 1), Corporation S reports that it uses moving average cost flow assumption which would be consistent with a perpetual inventory system.
3.
Identify whether Corporation S has purchase commitments and whether it is included in inventory or not.
Explanation of Solution
Purchase obligation: The situation where a company commits to purchase goods on a future date at a fixed price is referred to as the purchase obligation.
Corporation S has purchase commitments relating to green coffee of $1.196 billion, which consists of $860 million of fixed-price contracts and an estimated $336 million of price-to-be-fixed contracts (see Note 5). The purchase commitments of Corporation S are not included in its inventory.
4.
Compute the inventory turnover ratio for 2018 and 2017.
Explanation of Solution
Inventory turnover ratio: This is a financial measure that is used to evaluate as to how many times a company sells or uses its inventory during an accounting period. It is calculated by using the following formula:
Compute the inventory turnover ratio for 2018 and 2017:
Formula |
2018 Amounts in million |
2017 Amounts in million |
Inventory turnover: | ||
Average inventory: |
|
|
Table (1)
Thus, the inventory turnover of Corporation S for 2018 and 2017 are 6.59 times and 6.34 times respectively.
5.
Prepare summary journal entries to record the transactions that affected the inventory during the year.
Explanation of Solution
Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.
Prepare journal to record the entry for income tax of Company N at the end of 2019:
Date | Account title and Explanation | Post ref. | Amount (in million) | |
Debit | Credit | |||
2018 | ||||
December 31 | Inventory (1) | $9,023.7 | ||
Accounts payable | $9,023.7 | |||
(To record the purchase of inventory) | ||||
Cost of goods sold | $9,038.2 | |||
Inventory | $9,038.2 | |||
(To record the cost of goods sold) |
Table (2)
To record the purchase of inventory:
- Inventory is an asset and it is increased. Thus, it is debited.
- Accounts Payable is a liability and it is increased. Thus, it is credited.
To record the summary entry for inventory:
- Cost of goods sold is expense and it is increased. Thus, it is debited.
- Inventory is an asset and it is decreased. Thus, it is credited.
Working note 1: Compute the net purchases that affected the inventory:
Want to see more full solutions like this?
Chapter 7 Solutions
Intermediate Accounting: Reporting And Analysis
- Analyzing Starbucks Inventory Disclosures Obtain Starbucks 2017 annual report either using the Investor Relations portion of its website (do a web search for Starbucks investor relations) or go to http://www.sec.gov and click Search for company filings under Filings and Forms (EDGAR). Required: 1. What classifications are used by Starbucks to value its inventory? 2. How does Starbucks value its inventory? 3. What is the amount of inventory write-downs for 2018? Can you tell if Starbucks records inventory write-downs using the direct or allowance method?arrow_forwardUse the first-in, first-out method (FIFO) cost allocation method, with perpetual inventory updating, to calculate (a) sales revenue, (b) cost of goods sold, and c) gross margin for B75 Company, considering the following transactions.arrow_forwardEffects of Inventory Costing Methods Jefferson Enterprises has the following income statement data available for 2019: Jefferson uses a perpetual inventory accounting system and the average cost method. Jefferson is considering adopting the FIFO or LIFO method for costing inventory. Jeffersons accountant prepared the following data: Required: 1. Compute income before taxes, income taxes expense, and net income for each of the three inventory costing methods. (Round to the nearest dollar.) 2. CONCEPTUAL CONNECTION Why are the cost of goods sold and ending inventory amounts different for each of the three methods? What do these amounts tell us about the purchase price of inventory during the year? 3. CONCEPTUAL CONNECTION Which method produces the most realistic amount for net income? For inventory? Explain your answer.arrow_forward
- Use the first-in, first-out (FIFO) cost allocation method, with perpetual inventory updating, to calculate (a) sales revenue, (b) cost of goods sold, and c) gross margin for A75 Company, considering the following transactions.arrow_forwardUse the last-in, first-out (LIFO) cost allocation method, with perpetual inventory updating, to calculate (a) sales revenue, (b) cost of goods sold, and c) gross margin for A75 Company, considering the following transactions.arrow_forwardThe following data pertain to 2012 activities of Twisp Industries: Use your completed worksheet to determine the firms cost of goods sold for 2012. Remember to change the year in row 24 and to enter new beginning inventory balances. Save the 2012 file as MFG3. Print the worksheet when done. If sales and other expenses were identical in 2011 and 2012, during which year did Twisp earn more income? Why?arrow_forward
- 1.2 REQUIRED Calculate the following from the information provided below: 1.2.1 Value of closing inventory using the first-in-first-out (FIFO) method 1.2.2 Value of issues to production using the first-in-first-out (FIFO) method 1.2.3 Value of closing inventory using the weighted average cost method INFORMATION The following transactions of Gem Manufacturers took place during August 2022 in respect of a component used in production: Aug 01 11 17 18 31 Opening inventory Purchased from a supplier Purchased from a supplier Returned to the supplier (see 17 August) Issues to production during August 1 000 units at R20 per unit 3 000 units at R21 per unit 1 800 units at R22 per unit 800 units 3 800 unitsarrow_forwardneed solution for the problem p-22-3 from the book INTERMEDIATE ACCOUNTING AND REPORTING BY JAMES WAHLEN (3RD edition) Koopman company began operations on january 1 2018,and uses FIFO inventory method.... problem attached as pictures Required: Prepare the 2020 Financial Statementsarrow_forwardPART 1: Raw Materials Inventory Turnover A. How is this ratio calculated? What does the ratio show? Using the data below (Sunn Corporation) , calculate and discuss the implications of Sunn's RM Inventory Turnover. Days' Sales in Raw Materials Inventory B. How is this ratio calculated? What does the ratio show? Using the data below (Sunn Corporation) calculate and discuss the implications of Sunn's Days' Sales in RM Inventoryarrow_forward
- Required:a. Complete a subsidiary ledger record for the computer using each of the three inventory valuation methods listed below 1. Average cost.2. FIFO.3. LIFO. Your inventory records should show both purchases of this product, the sale on Mar 31, and the balance on hand on Mar 31, 2020. b. Which of the three cost flow assumptions will result in reporting the lowest net income for the current year? Explainarrow_forwardComparative Analysis: Under Armour, Inc., vs. Columbia Sportswear Refer to the 10-K reports of Under Armour, Inc., and Columbia Sportswear that are available for download from the companion website at CengageBrain.com. Required: What amount does Under Armour report for cost of goods sold for the years ending December 2016, 2015, and 2014? What amount does Columbia report for cost of goods sold for the years ending December 2016, 2015, and 2014?arrow_forwardCalculate a) cost of goods sold, b) ending inventory, and c) gross margin for A76 Company, considering the following transactions under three different cost allocation methods and using perpetual inventory updating. Provide calculations for first-in, first-out (FIFO).arrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage LearningCornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningFinancial AccountingAccountingISBN:9781337272124Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage Learning
- Financial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage LearningExcel Applications for Accounting PrinciplesAccountingISBN:9781111581565Author:Gaylord N. SmithPublisher:Cengage LearningPrinciples of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax College